InvestorQ : How does the RBI policy on rates influence portfolio flows?
Rashi Mehra made post

How does the RBI policy on rates influence portfolio flows?

Answer
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sarah Leo answered.
8 months ago


This is an important relationship in determining rate policy. There is an important external angle, which most policymakers do not talk about openly. A cut in rates normally tends to weaken the rupee and make Indian debt unattractive to FPIs. Both these factors are negative for FPI flows. The reason Indian debt was attracting massive foreign flows was that the real returns offered in India were as high as 4% till last year. This year that return has turned negative because of lower yields and specifically because of higher inflation. RBI was apprehensive that any further dovishness would make the foreign bond investors jittery and they could exit; creating a cascading effect. That is best avoided!